Dan Alpert's Two Cents

Please, Listen to the Lady!

The short essay below was first published online by The New York Times earlier today, as part of its Dealbook blog, edited by Andrew Ross Sorkin.

Sheila C. Bair, the Federal Deposit Insurance Corporation’s chairwoman, has had a tough time keeping her opinions to herself during this financial crisis, often in private and, not infrequently, in public.

As head of an agency that is funded by the very banks it insures and regulates, one might think that she would be vulnerable to co-opting by her constituent banks. Instead, as unpopular as some of her positions are within the banking establishment, Ms. Bair has been a stern mother to her unruly brood, as she proved again this week by taking issue with elements of the Financial Stability Improvement Act negotiated between the Treasury Department and the House Financial Services Committee.

Ms. Bair’s primary issue in connection with the act is the need to have banks absorb the cost of a future financial meltdown by pre-funding the act’s proposed financial company resolution fund. Her wisdom on this matter is pretty hard to take issue with: Chasing banks after a crisis, in order to avoid extraordinary calls on the F.D.I.C.’s depository trust fund, places the government in the untenable position of having to tap the banks when their resources are most depleted.

The agency’s trust fund is currently nearly depleted and the F.D.I.C. will surely be faced with the equally unattractive prospects of having to tap the Treasury or hit the banks for more premium payments while they are still experiencing increasing loan losses.

The F.D.I.C. chairwoman, by advocating for funding the proposed resolution fund during fat times, in order to avoid exhausting the depository trust fund during lean or crisis periods, is echoing the sound thinking of many, including Paul A. Volcker, the Federal Reserve’s former chairman, who insist that dynamic regulation in bank capital requirements and other prudential regulatory metrics needs to be incorporated in any reform package.

Dynamic regulation — requiring higher capital, loan provisioning, depository trust fund premiums/resolution fund contributions and the like when the economy is booming, and loosening regulatory requirements somewhat when things are slack — is the only practical way of avoiding future boom and bust crises.

But this issue is just the tip of the iceberg of disagreement between the F.D.I.C. and the rest of the Obama administration and Congress. From her public statements and the tone of her actions, it is clear that Ms. Bair remains extremely concerned that continuing to leave trillions of dollars of deteriorating loan assets in the banking system will only serve to sustain the status quo of (a) banks being unable to fulfill their capital-formation mission (lending), and (b) an unrelenting, though carefully-paced, stream of bank failures over a protracted period.

Back when all branches of government were worried more about the financial system’s viability, rather than its profitability, Ms. Bair creatively morphed the F.D.I.C.’s seized bank asset disposition programs into what became the Public-Private Investment Program’s legacy loan program to encourage banks to divest themselves of troubled loan assets (as opposed to securities) at reasonable prices. During the P-PIP’s short life, as circumstances would have it, private sector investors began to follow the government into the equity of banks and ignited a bank stock rally that quickly spread to the broader market.

This outcome, of course, delighted those in the Treasury, the White House and Congress who were thrilled at the prospect of life-giving equity flowing into the financial sector from someone other than taxpayers. But it also put tremendous pressure on Ms. Bair to put the legacy loan program on ice and refrain from rocking the boat amid all the talk of green shots and glimmers.

Obtaining price discovery on the market value of bank loans (which, unlike securities, need not be marked to market by banks) would have been counterproductive, of course, at a time when banks were only beginning to succeed in raising capital. Ms. Bair either understood that or was persuaded to appreciate the situation.

But she has not completely relented. The F.D.I.C. has kept alive the legacy loan program in connection with the boatload of distressed assets its division of resolutions and receiverships continues to inherit. And I would not be at all surprised if Ms. Bair believes that in the long run there more aggressive action will be required to resolve distressed bank loans, with the government providing the financial incentives and regulatory pressure to be able to do so.

Sheila Bair is no omniscient goddess of bank regulation or macroeconomics — and she can be quite controversial. In the case of her criticism of placing the Fed as the more-equal-among-equals in a proposed council of regulators, and the Treasury secretary as its chairman, she does seem somewhat protective of her turf and political at times. (That’s hard to avoid when Treasury Secretary Timothy F. Geithner tried to have her fired when the Obama administration entered office.)

But Ms. Bair and the F.D.I.C. continue to prove that they have the best interests of the country and the banking system at heart and that in the long run, failing to take a good dose of the medicine she prescribes to fix the banking system will be to the detriment of its health.

3 Responses to “Please, Listen to the Lady!”

11b40November 1st, 2009 at 12:54 pm

It is a wonder Ms. Bair is where she is. After all, she did not go to Harvard or Yale, did not work for Goldman Sachs, or any of the other revolving-door bankers, and seems to be the most obvious ‘outsider’ in the tight little cadre pulling the levers behind the curtains. She actually seems to have some common sense.And speaking of common sense.Parade Magazine is about as middle-America as a publication could be. In this Sunday morning’s paper, they published fesh survey results on how this recession is re-shaping our attitudes and perceptions. Here are some of the results:79% have felt the impact of the financial downturn.66% say it has had a big impact on their lives.69% have either lost a job, had pay reduced, or know someone who has.Almost half have either struggled to pay the mortgage or rent, or know someone who has.80% say they have been forced to do more with less.73% have had to make unexpected changes.19% have sought some form of govt. assistance.27% have pursued extra work.42% delayed or cancelled vacations.34% put off purchase of a major appliance.29% postponed or cancelled home renovations.28% elected not to buy a new car.87% are woried about the future of the nation.61% feel that they did everything right and still lost.65% can’t believe this has happened to us today in America.70% don’t believe our leaders have dealt well with the economy.71% feel betrayed by the government.76% say they will never trust investments the way the used to.65% feel anger toward Wall St.44% have adjusted portfoilios to reduce risk.71% are paying more attention to news about the economy.74% say they are more politically aware now.83% are re-considering what they actually need in life.68% say that “creating a meaningfull life” and “giving back” have become more important to them.43% are devoting more time learning new skills.30% report volunteering more.43% are exercising more.58% are reading more for pleasure.63% are becoming more “do it yourself” oriented.59% are getting more work done around the house.46% are connecting more with old friends.35% are re-discovering community or religeous groups.52% are forming stronger relationships with spouses.It is also noteworthy that large numbers think that the ‘consumer’ society distorted the meaning of America, but now – 67% say the true meaning is about the opportunity to acheive through hard work and education, and 60% say it is about the liberty to do what one wants.68% say the American Dream is still within their grasp, and that of their childern.89% are still proud to be Americans.89% feel we can overcome whatever the challenges may be, “as long as we come together to support one another.”Middle America is waking up.Independent Contractor

11b40November 1st, 2009 at 5:04 pm

Something quick from wikepedia:2008 financial crisisBair has played a key role in the management of the 2008 financial crisis. As reported in the Los Angeles Times, Bair was one of the first government officials to recognize the problem of subprime loans. At a conference in October 2007, she told investors: “More needs to be done, and done sooner rather than later,” to restructure mortgages for troubled homeowners. Bair assumed a prominent role in the Bush administration’s response to the crisis, including successfully pressing for a provision in the federal government’s financial rescue bill that temporarily raised the cap on FDIC insured deposits to US$250,000 per account (although this was not made retroactive to include depositors of IndyMac Bank which had failed just 90 days beforehand). She also used regulatory powers to temporarily guarantee bank debt and insure all non-interest bearing deposits to an unlimited amount. Additionally, Bair worked with the Treasury Department to inject capital into the country’s largest financial institutions.[6][dead link]On July 14, 2008, Bair temporarily halted all of the foreclosures on bank-owned loans in the portfolio of IndyMac Bank.[7]Chairman Bair also oversaw the attempted acquisition of Wachovia by Citigroup, which was later nullified by the acquisition of Wachovia by Wells Fargo and the actual acquisition of Washington Mutual, the largest failed bank in history, by JP Morgan Chase.[8] As to the aborted Wachovia-Citigroup acquisition, on October 2, 2008, Wachovia President and CEO Robert Steel received an unexpected call from Bair indicating that Wells Fargo was prepared to make a buy-out offer for Wachovia. Bair encouraged Steel to “give serious consideration to (the) offer,” despite the fact that Wachovia had only days earlier entered into a non binding agreement in principle to sell its banking operations to Citigroup for $2.2 billion.[9]Bair publicly criticized the Bush Administration’s $700 billion bailout package, saying it will not do enough to help Americans facing foreclosures. Bair told the Wall Street Journal “[W]e’re attacking it at the [financial] institution level as opposed to the borrower level, and it’s the borrowers defaulting. That is what’s causing the distress at the institution level,” she said. “So why not tackle the borrower problem?”[10] On Friday, November 14, 2008 Bair released details of her much more ambitious plan – a $24.4-billion program aimed at preventing 1.5 million foreclosures – even though Treasury Secretary Henry M. Paulson had told reporters earlier in the week that he would not pay for it.[6]In an interview with Chris Wallace on Fox News on March 15, 2009, (see minutes and seconds 3:54-3:49) she said, “Right now 98 percent of the banks representing 98 percent of the banking assets exceed regulatory standards for being well capitalized.”[11]While I tend view anyone involved with this, or recent, administration(s) as suspect, Ms. Bair does seem to be one of the brighter bulbs in the box. Also has courage and what looks like integrity to me. Mr Alpert has it right – Washington should be lsitening to her instead of the Central Bankers.Independent Contractor